China’s quest for economic growth moves from factory to laboratory

Wen Danyi, who founded Shanghai LIDE Biotech after 17 years of study and work in the United States, has good reasons to be confident about her cancer drug contract research organisation’s future in a country where there are 12,000 new cancer patients and 7,500 cancer deaths every day.

With the world’s largest ageing population, China is in dire need of better and cheaper drugs to treat patients and Wen, with her five-year old firm, is helping global pharmaceutical companies such as Merck and the country’s top-ranking hospitals, including Peking Union Medical College Hospital, to speed up the development of cancer drugs.

Wen said she decided to give up a decent job in the US after being diagnosed with a thyroid tumour 11 years ago. After having surgery, she wanted to do something that had a bigger impact on society.

“Five years ago, there were few Chinese companies making new drugs, but in recent years demand from local clients is burgeoning,” Wen said.

Wen’s journey is a small piece of the world’s No 2 economy’s struggle to seek economic growth from laboratories rather than factories. As the country’s traditional growth engines of wasteful investment and cheap exports have lost steam, the Chinese government is trying to encourage “innovation” at home to put growth on a sustainable track.

China’s quest for an innovation-driven model to avoid the so-called “middle-income trap” has achieved progress in certain fields. The country was for the first time ranked in the top 25 list of the Global Innovation Index released by the World Intellectual Property Organisation, a United Nations agency, becoming the only developing country in the top 25 positions.

At least on paper, China is a leader in innovation when measured by the number of patents granted and research papers published in key publications. China’s State Intellectual Property Office granted 359,000 patents in 2015, the largest number in the world.

However, unlike China’s proven abilities in building bridges and stadiums, China’s self-proclaimed innovation results are often improvements of original designs instead of major breakthroughs, and few of these results can translate into practical benefits, researchers say.

“The ultimate goal for innovation should be turning achievements on paper into profit – to create greater value for companies and society and, in this sense, our innovation is incomplete,” said Xu Chunming, a deputy head of Shanghai University’s Intellectual Property Institute.

Xu said most of China’s patent applications are driven by government incentives – universities apply for patents because they can get government funding for certain projects, and enterprises do so because by having a certain number of patents they can be designated as “high-tech” companies, which often enjoy preferential policies on taxation and subsidies.

While China’s state-dominated research apparatus plays an important role for the country to complete landmark projects such as sending a person into space, creativity at businesses is often depressed by lax intellectual property protection, tedious administrative procedures to approve new products and lack of funding support for research in the private sector.

In the business of cancer drug research, even though China is keen to bring back domestic talent from overseas, local firms produce mainly “me-too” or “me-better” drugs based upon existing products in overseas markets, said Wen from Shanghai LIDE Biotech.

Wen’s firm reported a 70 per cent growth in revenues in 2015 to 10.2 million yuan (HK$11.85 million), but the firm’s losses amounted to 21.7 million yuan last year, according to its published financial statements for listing on China’ small-cap market.

China is still a follower, not a leader, but it is moving ahead.

Wang Xuegong, a deputy chairman of the Chinese Pharmaceutical Enterprises Association, said local companies focused on copying commercially available foreign drugs two decades ago but, in the past five or 10 years, had started to develop their own drugs once new pharmaceutical breakthroughs were made by their US or European counterparts.

“We are moving closer to the leaders, but we still don’t have strong abilities to make our own breakthroughs,” Wang said. The return of talent had quickened the process as many new drugs in recent years were created by ventures like Wen’s, he said.

The Chinese government has set a target of spending 2.5 per cent of GDP on research and development by 2020, from 2.1 per cent in 2015. But the jury is still out on whether a state-led system can bring the desired breakthroughs.

Chen Jing, a research director at Hong Kong-based Asia Vision Technology, said most of China’s registered scientific innovations are driven by the government, although the real driving force for technology progress “should be businesses”.

“Research and development by businesses produces real things that matter to daily life” and government-sanctioned research mostly results in paperwork, Chen said.

In the annual Top 100 Global Innovators report published by Thomson Reuters for the past five years , only one Chinese firm, Huawei, made it onto the list and only once – in the 2014 report.

China’s leaders plan to catch up. In a national plan on innovation issued in May, the State Council vowed to make China a global leader in science and technology by 2050.

“For now, there are only a handful of areas where I would say we are leading global competition, like quantum communications. We are lagging behind the US, Europe or Japan in most fields,” said Dr. Yuan Lanfeng, from the University of Science and Technology of China.

It would take about two generations of scientists for China to narrow its technology gap with the US, said Yuan, who is an active online commentator on technology and innovation.